Episode : #1,221: Private Buyer vs. DSO: What Can Go Right (and What Can Go Wrong)

Podcast Description

Part two of Kiera’s conversation with Brannon Moncrief, principal and CEO of McLerran and Associates, is about common misconceptions with private buyers and DSOs. These include which tends to have more patient and/or staff turnover, types of equity that matter more than others, when deals tend to go south, and a ton more.

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Transcript:

Kiera (00:23)

Can you walk me through private buyer versus DSO? Like what is the dark? What’s in the shadows? What are like the horror stories? And I don’t want to freak people out. I feel like it’s just a good way to educate of like what things can go wrong instead of just looking for all the things that can go right. And then we’re able to make the most educated decisions.

Brannon Moncrief (00:39)

absolutely. So let’s talk about private buyer deals first. So couple of things that we see in the private buyer world. One, I think a lot of sellers are under the misconception that selling to a private buyer means protecting their legacy and less change for their practice post sale compared to selling to a DSO. I would tell you that as long as you’re selling to a good DSO.

And there are good and bad players out there, no doubt. We’ll talk about that in just a minute. As long as you’re selling to a good DSO that is in the business of buying great practices, partnering with great clinicians, and wanting to just perpetuate what you’ve built, more change will actually occur in your practice post sale with a private buyer than a DSO. And the reason being is that a private buyer is going to show up every day. They have bought 100%

Kiera (01:30)

For sure.

Brannon Moncrief (01:31)

of your business. They’re going to physically show up to your practice every day.

They’re likely from a different generation. They were trained differently. And they will have different ideas and different motivations clinically and personally, professionally, financially, about where they want to take the business. Therefore, you’re going to see more change faster when you sell to a private buyer than selling to a DSO. And because they physically show up to your office every day, they have a different personality than you. You have these long-term relationships with your staff and patients. They might not click.

Kiera (02:05)

Mm-hmm.

Brannon Moncrief (02:05)

So you might see

more patient turnover, you might see more staff turnover with a private buyer than a DSO. A DSO is not gonna plant somebody in your office that’s going to, you know, wear the DSO cap all day and transform your business into something that it’s not. They’re gonna rely on you to continue doing what you do well and then outsource all the administrative and operational tasks that you’re not ultimately good at to them.

And behind the veil, they’ll help make your business operate more smoothly and more profitably. So I think that’s a big misconception that, if I sell to a DSO, they’re gonna destroy my legacy, they’re gonna change my practice. If I sell to a private buyer, that’s the perpetuation of of what I’ve built over the past 30 years. That is not necessarily the case. from a private buyer, you know, perspective, I think dealing with associate to purchase and partnerships.

It is a big thing to talk about. The partnership failure rate is extremely high. It’s higher than the divorce rate. Partnerships

Kiera (03:07)

Mm-hmm. Yes.

Brannon Moncrief (03:09)

are very easy to get into and very hard to get out of. So you need to make damn sure that you’re ready to get married to somebody from a professional perspective and have an ironclad partnership agreement

Kiera (03:24)

Anyway.

Brannon Moncrief (03:24)

where you address everything that could go wrong on a go-forward basis because

Kiera (03:28)

Yep.

Brannon Moncrief (03:30)

there is a high probability.

That there are going to be, whether it’s life events or disagreements within the business, that you’re gonna have to get through. And if you don’t have

Kiera (03:38)

Mm-hmm.

Brannon Moncrief (03:39)

the right partner, communication is going to break down and the business is going to suffer, you know, as a result. We’ve also seen a lot of situations where an associate will join the practice with the intent of eventually becoming the successor and the owner, but the associate and the seller don’t work out the details on the front end. And oftentimes when

They’re ready to consummate the transaction. They have very different ideas about what the business is worth or how the deal is going to be structured. Sometimes the timing doesn’t align. You know, sellers said that they were going to sell the practice in two years. Two years comes around

Kiera (04:14)

Okay.

Brannon Moncrief (04:14)

and they’re like, you know what? Life’s pretty good. You know, I’m only working two days a

Kiera (04:17)

Yeah.

Brannon Moncrief (04:18)

week now. I’m playing a lot of golf. You’re working your ass off. You know, I’d like to wait another two years. And you’re going to continue, you know, supplementing my production and helping create this lifestyle practice for me.

And then the associate’s got to go, crap, do I wait two more years or do I bounce and try to find another opportunity? Or vice versa, where seller said,

Kiera (04:39)

Mm-hmm.

Brannon Moncrief (04:39)

Hey, I want to be ready to sell in two years, you get there and you know, associate just started a family, right? Or decided they don’t want to pursue

Kiera (04:46)

Yeah.

Brannon Moncrief (04:47)

practice ownership. And now seller’s going, do I wait for this person to mature and turn into my successor? Or do I need to start over with somebody

Kiera (04:57)

Mm-hmm.

Brannon Moncrief (04:58)

else? So if you’re gonna go down that path.

My advice is to have those conversations on the front end and establish the rules of the game

Kiera (05:05)

Great.

Brannon Moncrief (05:06)

and do it in a formal framework in writing.

Kiera (05:09)

Mm-hmm.

Brannon Moncrief (05:10)

don’t wait until the day you’re ready to sell to sit down and have serious discussions about when that’s going to happen, how it’s going to be done structurally, how the practice is going to be valued. Do it on the front end. And then from a private buyer perspective, I would just say like a lot of these deals can go south post sale.

Kiera (05:31)

Yeah.

Brannon Moncrief (05:31)

As a

result of a breakdown in communication between buyer and seller and arguments over petty, petty stuff. Right.

Kiera (05:38)

Yep. Yep.

Brannon Moncrief (05:40)

And I will tell you that the number one way that buyers and sellers get sideways in a private buyer deal is over accounts receivable and credit balances. so y yeah, you you you know I’m speaking your language here.

Kiera (05:51)

You’re not wrong. I do.

Brannon Moncrief (05:56)

Making sure that your AR and credit balances are as clean as possible when you go to sell, and

Kiera (05:58)

Mm-hmm.

Brannon Moncrief (06:01)

ideally selling the AR to the buyer and writing them a check for the credit balances at close so that the day

Kiera (06:10)

You’re done.

Brannon Moncrief (06:11)

after the sale, every dollar of revenue that comes in it belongs to the buyer. And there’s no

Kiera (06:16)

Yep.

Brannon Moncrief (06:17)

weird conversations about, for instance, patient patient comes in.

Kiera (06:21)

These make me laugh.

They’re a mess.

Brannon Moncrief (06:24)

We see these things all the time. So a patient comes in post sale, seller’s no longer there, but seller did not sell the receivables. So the buyer is collecting the seller’s receivables and remitting them to the seller post sale. Patient

Kiera (06:36)

Yep.

Brannon Moncrief (06:38)

comes in that has a previous balance with the seller, gets work done by the buyer, the new owner, writes one check at the front desk. What do you think the front office person does? They don’t, they just deposit the check into the buyer’s

Kiera (06:50)

They deposit it. Exactly.

Brannon Moncrief (06:52)

bank account.

And now the buyer has some of the seller’s money sitting in their bank account and it hasn’t been properly accounted for at the front desk. Eventually, especially if that happens multiple times, there’s going to be a problem. And even if there was no malice, right, involved, the seller’s going to get pissed off that the buyer is not abiding by their word and collecting those receivables and remitting them to them properly, even though the buyer didn’t mean to.

End up with some of the sellers money in their bank account. So these are the types of things that one, if you can plan for it on the front end and make it as clean as possible, you know, in regards to how you structure the deal, how you how you navigate the agreements. But two, on the back end, just communicate and be calm and behave

Kiera (07:40)

Mm-hmm.

Brannon Moncrief (07:42)

like normal people and do the right thing. And as long

Kiera (07:46)

Yeah.

Brannon Moncrief (07:46)

as everybody does that, everything’s gonna be fine.

But we have seen people get in lawsuits over 300 bucks. I mean, just crazy,

Kiera (07:54)

Yep.

Brannon Moncrief (07:55)

crazy stuff. And unfortunately, we haven’t talked about this yet. It’s a very emotional process, especially doctor to doctor. For the seller, they’re selling their identity. They’re they’re dealing with talking about their own mortality, right? And it’s their baby. it’s been their life’s work, you know, for the past 30 years. It’s not just a financially impactful.

Transaction. It’s very emotionally impactful. And for the buyer, you know, they’re five years out of school. They’ve got a significant amount of student loan debt. They’re about to triple the amount of debt they have when they go and buy your practice and borrow another million bucks to do so. They’re starting a family. They’re buying their first house. Like they got a lot of balls in the air. They’re at a completely different stage in their life than the seller.

Kiera (08:47)

Yeah.

Brannon Moncrief (08:48)

it’s a lot.

It’s a lot of stress, it’s a lot of pressure. So you’ve got high emotions on both sides of the transaction. And that’s why you normally see erratic and poor behavior and poor communication and things go off the rails over very, very small issues. And that’s where hopefully you’ve got a good broker involved. You know, they’re helping, you know, hold hands on both sides and serve as that buffer and manage those emotions, both during the transaction and and afterwards. So

Those are some of the dark paths that that you can go down from a a a

Kiera (09:18)

Yeah.

Brannon Moncrief (09:20)

private buyer perspective. You know, from a DSO perspective. Yeah, absolutely. Please.

Kiera (09:23)

Can I jump in? I’m gonna jump in real quick on some of the because I agree

with you. And I’m always let’s talk about the credits in the AR real quick. there’s a piece of me that’s like, as a buyer of this, do you really want to be paying your front office girl to go collect money for this person that you now have to pay back? The answer is a hard no. So when I think about that, of like, let’s just think through the logistics of how this AR is going to get collected. Cause I did this on my first practice purchases when I giggled and it was a freaking nightmare and I had a

have all the writing down and I had to say like, my gosh, like we owe this guy this much money. And it was just dumb. I was like, I wish we would have gotten it for a lesser deal. Whatever we collected, we gotta keep. We’re motivated to collect it. I’m not trying to pay my front office girl to go hustle her booty while she’s on my dime to go collect for this seller. So that was a big zone. I don’t disagree with you. And the credits get a check up front because you’re going to be redoing their work and you’re going to be so annoyed with how much redo dentistry you’re

Having to do or all those credits sitting out there that you’re like, my gosh, I paid for this and I’m doing it for free. So absolutely agree with you on that. And I’ve been through two partnerships myself. I’ve been on dental practices. So speaking of that partnership, I always say plan the divorce from the day one. Like, what’s gonna happen? How are we gonna separate? What are the things like what’s gonna happen if I don’t want to keep working? How does that look? And when you said that, Brannon, like again, speaking from real life cura, I’ve gone through this a few times. if I would have known what the outcomes were going to be from the seller.

Coming in as a buyer, because I always put money in. I was annoyed. Someone sold it out from under me. And I was like, what the heck? Like, how did I not even know this was selling? Like they’re like, sorry, you lost money. And I’m like, but I didn’t even get to see the books and I put money in to purchase this. It was like, hey, I want to go in, like you said, start a family, or I want to go be with my husband, or like these different things. And I was like, no, you can’t. Like you’re part of this deal. And I was like, I didn’t even know I was part of this deal. So really talking about like what are those big things, what’s going to happen.

Because when everybody has the rules of the game before we start the game, we can play the game way more fairly with each other. And agreed, when I look at the life cycle of the seller and the buyer, the buyer, like you said, is coming in at a very young early stage. Like imagine them as like toddlers in their professional career. And you are like ready to go off and play pickleball in retirement. You’re on very opposite sides. Your team is at a very opposite side. So recognizing, I love that you said that people are going to feel this way of

my gosh. Like I never thought about the legacy changing so much with selling to a private buyer. I am curious before you head to DSO, I have this opinion and I really am curious if you can back it with facts. So many dentists feel like they’re doing the right thing by selling to a younger buyer to keep their legacy alive. However, what I have seen is they do and they feel good. They brush their shoulders, they’ve sold it to their associate that’s gonna take care of the legacy.

Well, that associate, like we just said, about the life cycle of them, they’re young, they got debt, they got a lot of debt on them, they’ve got a lot of things. And these DSOs are chirping in their ear left and right. That I’ve seen a lot of those younger buyers actually sell to a DSO. So it’s a few years after they did the legacy. So the reason I bring that up is because I think a lot of legacy dentists are wanting that legacy and they’re not even looking at the DSO route because they think they’re doing the right thing. But then that younger buyer then just flips around and sells it to the DSO for a higher multiple. So I’m curious, like.

Is that true from your perspective and what you’ve seen? Because I just think it’s important for dentists to not feel like they’re being the good old boys or the good old girls and like doing the right thing. But then the next dentist is just selling it for the higher multiples that they could have gotten.

Brannon Moncrief (12:50)

Think it’s it’s noble in principle, but in reality, it’s kind of a falsehood, right? We have

Kiera (12:56)

That’s how I feel.

Brannon Moncrief (12:57)

we have had multiple clients on the DSO side that were those associates that bought the practice. And as soon as the seller walked out the door, right? So

Kiera (13:07)

Yep.

Brannon Moncrief (13:07)

and a lot of those deals, the seller actually stayed on for a year or two, and the practice grew substantially post-sale, or

Kiera (13:13)

Mm-hmm. Yep.

Brannon Moncrief (13:14)

was already in the position to be a candidate for a DSO sale.

But the seller chose to go the private buyer route to protect private practice dentistry and their legacy. And then right when they walked out the door, I got the phone call. Hey, I bought this practice two years ago. I’ve doubled it. You know, my EBITDA is sitting at 700,000. I want to sell it and then go back to being an associate. And,

Kiera (13:38)

Exactly.

Brannon Moncrief (13:39)

you know, they they basically triple what the seller could have gotten. You know,

Kiera (13:43)

Absolutely.

Brannon Moncrief (13:44)

if the seller had

waited, put in the same amount of energy, and then sold it to a DSO, they would have been way better off economically. So it’s noble, but I do think that if you have a practice of the caliber and size that a DSO would be interested in purchasing, you need to at least explore it. Don’t just discount

Kiera (14:04)

Feel the same.

Brannon Moncrief (14:05)

it and say, hey, that’s not the right path. That’s not good for dentistry. You need to do ultimately what’s right for you. Because

Kiera (14:13)

Mm-hmm.

Brannon Moncrief (14:15)

Whether you like it or not, private equity is here to stay. DSOs

Kiera (14:18)

I agree.

Brannon Moncrief (14:18)

are here to stay. Your stand is ultimately not going to matter in the big picture of how private practice evolves.

Kiera (14:29)

Mm-hmm.

Brannon Moncrief (14:29)

so I I agree with you. You at least should look at it. It may not make any sense, right? We may go through it and hey, at least you looked under that rock. but to completely ignore it based on principle, I don’t think is a good idea.

Kiera (14:43)

I agree. I just wanted to like throw that out there because I feel like so many legacy dentists are really trying to do the right thing in their minds. And yet these younger doctors, and I’m not here to like throw shade at the younger doctors, it’s just the different lifestyle that they’re in. It’s the different I mean, shoot, how can any of us, if we had that much debt and loans on us, not explore a DSO when I have a way to get out of that debt and I don’t have to work for the next thirty years of my life? It’s just a different style that they’re living in. So okay.

Let’s do let’s do a quick wrap of the dark side of DSOs. Thank you for like going a little longer with me. I definitely want to have the part two of this because I feel like people are just always curious about what’s under the hood on both sides.

Brannon Moncrief (15:20)

No, I I love it. I do want to check one more thing on partnerships, because we’ve actually had this conversation on with some of your clients, large practices with with

Kiera (15:27)

Mm-hmm. Yep.

Brannon Moncrief (15:30)

multiple associates that are DSO targets, where a the founder is contemplating do I s do I partner with a DSO or do I I give or or sell minority own equity to my associate doctors? And a lot of them have decided to go the minority equity route to their associate doctors.

I want to make the point that if you’re going to give or sell minority equity to an associate, one, even if they’re minority partners, they’re they’re going to want to say in what happens with the business on a go-forward basis. They’re going to want to see it at the table, even if you’re not equal partners, especially if they’re paying for the equity. And two, they are not likely going to step up and help you run the business. So I think what

Kiera (16:13)

So true.

Brannon Moncrief (16:14)

you should look at it as is it’s a retention tool, not

Kiera (16:18)

I would agree.

Brannon Moncrief (16:18)

a

Not a tool to offload the operational and management responsibilities where you know you’re gonna be able to be on a yacht most of the time while your associate that’s got 15% equity not only works chair side but also runs the business for you. And that’s where, if that’s what you’re looking for, like less operational and management responsibility, I think the DSO makes more sense because they’re gonna pay two or three times the price.

That a private buyer is going to pay. And they are designed to provide you with support from an operational perspective. So just be careful about your mindset. And if you’re gonna sell minority equity to associates, understand that’s a retention tool, not a tool to offload your operational and management responsibilities. And therefore, again, you may wanna look at the DSO route.

As opposed to selling minority equity to your associates, at least, at least look at it. And sometimes

Kiera (17:23)

Mm-hmm.

Brannon Moncrief (17:23)

that helps put you in the right frame of mind, at least, should you proceed with your associates, as opposed to selling, pursuing a sale to a DSO. The other thing is also just thinking about the back end. What happens when you go to sell the majority of your equity? Are your associates

Kiera (17:40)

Mm-hmm.

Brannon Moncrief (17:41)

your buyer? What happens if they don’t want to buy? Right.

Kiera (17:43)

Right.

Brannon Moncrief (17:44)

Now you’re stuck where you own 60% of the practice and you’ve got two associates that both have minority equity ownership and they’re like, hey, I’m happy. I don’t want to buy your 60%. by the way, I’m the future of this practice. I’m gonna block a DSO sale. And

Kiera (17:58)

Mm-hmm.

Brannon Moncrief (17:59)

now it’s like, well, what the hell do I do with the remainder of my equity? Right? If I can’t

Kiera (18:01)

Yeah.

Brannon Moncrief (18:03)

sell to a DSO and my associates don’t want to buy it, what happens now? So we’ve seen that.

Kiera (18:08)

Yeah, ’cause I have heard

I’ve heard a rumor that if you have minor minority partners with associates that it is actually harder to sell to a DSO. Is it because of this or is it also on the DSO side because now they got multi partners that they’re having to convince and sell to?

Brannon Moncrief (18:22)

ESO actually loves it. That option is still

Kiera (18:23)

Okay.

Brannon Moncrief (18:24)

available to you. However, those minority partners have to be on board and complicit with the sale.

Kiera (18:29)

And I know you think

because all the owners are like, Yeah, but I put it in our agreement that they can’t do this. And I’m like, but they’re an owner. Like they own. You can’t just override them. And they o don’t own just I mean, I had like a five percent in one and they overrid me hard and it was sold before I even knew. And I was like, Got it. Like, but it was five percent. I was very, very, very tiny. I still don’t think that that was legal, but it did happen. So like there was one. But

Like most of the time you’re giving them like fifteen to twenty percent equity in your business. That’s not a small five percent. And they’re also working in the business day in and day out. I was a five percent quiet minority, like wasn’t even in the business. There’s different ways that these deals are done. So that’s good to hear that it doesn’t block you on the DSO, but I do agree on the associates. Make sure they’re really bought. And I think owners feel like, no, they’re gonna be on board with me. And I’m like, you have to realize they have like 10 more years, 20 more years they want to work. They don’t want to sell their business and go be an associate somewhere else.

And you’re like, but they’re gonna get a big payout. And I’m like, but they don’t because they’re in so much freaking debt because they just bought your practice. So there are different pieces that I think you need to consider of that minority partner that’s very different than you in your OG years of like, this is your retirement. They’re not there to retire. They’re they’re still hungry and they still want to work. And so I I agree with you. Those minority partners feel really good, but I sometimes see them as more golden handcuffs on the seller, like the legacy doctor, than they are on the associate. It’s a great retention piece.

But it also puts you in like less options in the future too.

Brannon Moncrief (19:54)

And like you said, you can design the legal agreement in a way that you have a drag-along right, a unilateral right to legally

Kiera (19:59)

Mm-hmm.

Brannon Moncrief (19:59)

do whatever you want. However, if they’re now the primary producers, they’re the youth, they’re the future of the business, the DSO is going be super sensitive to making

Kiera (20:09)

Mm-hmm.

Brannon Moncrief (20:09)

sure that they’re complicit in the sale. And if they’re not, regardless of what your legal agreements say, if the key providers in the future of the business are not on board, the buyer is going to back away from the deal.

Kiera (20:21)

Right.

Brannon Moncrief (20:21)

And

that’s where these deals go south. So you just need to think through all of this. And these are some of the roadblocks, some the challenges that we see in the private buyer world, especially as it pertains to partnerships and, you know, associates.

Kiera (20:35)

Awesome. Okay. flip side DSO. Tell me about the dark side of DSO.

Brannon Moncrief (20:41)

I would say there’s there’s several. So first and foremost, the reason that we exist as sell side advisors is DSOs and private equity from a buying perspective are relatively predatory. Their goal is to buy low and sell high. And they have created an entire ecosystem of trying to get in front of sellers without them having proper representation, without

Kiera (21:08)

Mm-hmm.

Brannon Moncrief (21:08)

having competition at the table.

Because they know if they have a conversation in the dark and do a deal without the seller having proper representation, without being in a multiple offer situation, they can pay less for the asset. So

Kiera (21:25)

Mm-hmm.

Brannon Moncrief (21:26)

many DSOs have built huge marketing machines that push out a lot of direct mail. They have business development teams where their only job is to bird dog potential sellers and they pay, oftentimes, both.

You know, advisors and doctors to introduce them to potential sellers. If you’re gonna go down that path, those are shark-infested waters. You’ve got

Kiera (21:50)

Mm-hmm.

Brannon Moncrief (21:51)

to make sure you have proper representation, whether it’s us or somebody else, you’ve got to have a sell-side advisor at the table. You have to be in a multiple offer situation to create the leverage that you need to maximize the economic outcome. And I would say, even more importantly, the optionality you need to find the right buyer.

Because not all DSOs are created equal. And if you’ve talked to one, you’ve talked to one. They’re all different. So you need to shop around, you need to date around to find the right fit, because fit and deal structure are the two things that are gonna impact your long-term happiness if you go down

Kiera (22:25)

Mm-hmm.

Brannon Moncrief (22:26)

the DSO path. Yes, the valuation matters. Yes, the cash at close matters. But the type of equity you hold, the rights you have

Kiera (22:34)

Yeah.

Brannon Moncrief (22:34)

with that equity.

Who you partner with from an operational perspective and from a financial perspective is going to dictate your long-term outcome. So

Kiera (22:43)

Mm-hmm.

Brannon Moncrief (22:44)

that’s first and foremost is DSOs are predatory. Don’t do this on your own. Thinking that you’re going to save a commission, you will cost yourself millions and a lot of heartache down the road. Secondly, again, kind of going back to the DSO’s going to change my business. You know, they’re going to destroy my legacy.

I will say there are DSOs out there where the suits think they’re smarter than the doctors. And

Kiera (23:10)

Mm-hmm.

Brannon Moncrief (23:11)

I would argue that long term those DSOs are going to crash and burn. So you

Kiera (23:15)

Agree.

Brannon Moncrief (23:15)

do not want to be sitting at the table with one of those buyers, right? And that’s also why you need to fill that table in a competitive process so that those buyers stand out in a bad way. So that you know, hey.

Kiera (23:30)

Mm-hmm.

Brannon Moncrief (23:31)

Based on all these interviews that I’ve done with all these potential buyers, I don’t like those two people. I don’t like what they had to say, how they answered my questions, comparatively speaking, to the other buyers at the table. They’re good actors and bad actors. You want to make sure that you stay away from the bad actors. Again, big part of what we do, vetting these DSOs and making sure we only bring the best of the best options to the table because they’re continue to be bad actors in the marketplace.

You will also hear some horror stories about how a DSO came in and tried to change my business and ruined my business. I will say that a lot of those stories are not completely truthful. You don’t have context.

Kiera (24:15)

It’s true.

Brannon Moncrief (24:16)

Oftentimes, what happens is the seller takes their foot off the gas. The seller takes

Kiera (24:21)

Mm-hmm.

Brannon Moncrief (24:21)

5 million, 10 million cash at close, and then loses the motivation.

continue to work hard and manage the business and the business suffers as a result. Well if I’m the DSO that bought that business and my partner completely checked out post sale because they hit their retirement goal, my only option is to lean in, put my hands on the business and try to write the ship. So oftentimes when you hear those horror stories, there’s a precursor there that is not explained. Bad behavior on behalf of the doctor post sale

cause the DSO to have to have a heavy hand from an operational perspective. So there are those bad actors out there, but there are also stories online that I see all the time where I’m like, what’s the truth here? Because I actually

Kiera (25:10)

Mm.

Brannon Moncrief (25:12)

know that potential that actual DSO, I’ve done 20 deals with them and I’ve never heard that story from one of my clients. So you either weren’t ready to take on a partner, right? Emotionally or financially. Some doctors

Kiera (25:25)

Mm-hmm.

Brannon Moncrief (25:26)

Can’t make that shift, right? You need really think about that. If you haven’t been an employee for 30 years, are you employable? Right. Are you gonna do you play nice with others if you’ve

Kiera (25:36)

Mm-hmm.

Brannon Moncrief (25:37)

been, you know, king of the hill for the past 30 years, right? You need to think about that as well. So that’s that’s another nuance. The biggest one is the equity, right?

Kiera (25:48)

Mm-hmm, mm-hmm.

Brannon Moncrief (25:49)

For a long time, nobody talked about the downside in the equity because.

Private equity is making money hand over fist for about a decade previous to 2024. there were many recaps from 2018 to 2023 at really great returns. I mean, some BSOs hit multiple recaps at a three to five X return on invested capital. Those are amazing financial outcomes. But the game changed in 2023 when interest rates increased rapidly. And

The capital markets tightened up, along with the fact that we were mid-consolidation, meaning that any industry that’s being consolidated by private equity, you’re gonna have winners and losers. But it takes time for that to play out. It takes five to ten years to figure out who are the winners and losers. They’re not all going to be successful. When you layer on a rapid increase in interest rates, and these are heavily levered businesses where

The carrying cost of the debt is substantial, along with significant inflationary pressure on overhead, along with being mid-consolidation cycle where the winners and losers start to separate themselves from each other. It accelerated the the path of the losers, right? And you can get several casualties, multiple DSOs fail. Now, that doesn’t mean that the practice is all closed. It just means that they’re kind of zombie companies from an equity perspective. And

The doctors likely are not going to have a good outcome on their equity long term. And then you’ve had other DSOs that were built on a strong foundation, the winners of the game that have done remarkably well, despite the more challenging macroeconomic environment that we’ve been up against the past few years. So anytime you’re talking about private equity, there’s winners and losers. And all other outcomes are going to be somewhere in between. They’re going to be people that go to zero. They’re going to be people that get a unicorn outcome, a 5X return on equity with three recaps.

And then there’s going to be people that get a more modest return. We want to keep you away from the losers. And I’m happy to say it was relatively easy for us to identify who the losers were going to be. You know, you play in the sandbox enough. You stand at the water cooler and listen to the the talk. You meet the management teams, you hear the investment thesis, you watch their buying behavior. It’s relatively easy to figure out like whose house of cards versus

Who’s built on a strong foundation and who’s going be successful? So of those DSOs that have been, you know, pure casualties, gone bankrupt, we haven’t sold a single practice to them. I’m proud to say that. now, will there be more casualties in the future? Yeah. Yeah, there will be. but I will say the reckoning that we’ve been through over the past few years has caused private equity and DSOs, for lack of a better phrase, excuse my language, to get their shit together.

Kiera (28:52)

Mm.

Brannon Moncrief (28:53)

So long term, it’s been good for the industry because DSOs have had to become operators, not aggregators. They’ve had to learn how to integrate and operate the businesses that have acquired and grow those businesses post-sale. As

Kiera (29:06)

Mm-hmm.

Brannon Moncrief (29:06)

a result, they become much better operators and much more astute and much more disciplined about what they buy, what they pay

Kiera (29:13)

Mm-hmm.

Brannon Moncrief (29:13)

for it, and how they structure deals. So they’ve just gotten a lot smarter. So you’re going to see less casualties on a go-forward basis than you’ve seen over the past few years.

And I do think that you’re going to see more recaps and modest but positive results on the equity with some DSOs, not all, over the next few years. So the reckoning’s been painful for some, you might say many, but I think it was a needed reset. and it’s a natural progression of any private equity backed industry. But be careful because

There are plenty of DSOs out there today that are actively buying practices that will put a letter of intent in front of you and show you that your equity is going to see a 20x return over the next

Kiera (30:02)

Yeah.

Brannon Moncrief (30:02)

15 years through multiple recap events. I can tell you that some of those DSOs I am 100% confident are going to go bankrupt. We do

Kiera (30:10)

Mm-hmm.

Brannon Moncrief (30:11)

not allow those DSOs to sit at the table with our clients. But that doesn’t mean that they won’t give you some crazy financial projection that’s never going to come true. So

Kiera (30:20)

Mm-hmm.

Brannon Moncrief (30:21)

Again, having proper representation, people that know the lay of the land, that know who to bet on and who not to bet on, that’s extremely important because yes, the equity does have a potential wealth creation opportunity, but it does have risk. And that risk

Kiera (30:38)

Yeah.

Brannon Moncrief (30:39)

has been illustrated, you know, over the past few years in a major way.

Kiera (30:43)

Totally. And Brannon, I I love how you talked about to me, I feel like if you’re going into a DSO cell, make sure your cash at close of whatever it is you’re good with. Like if you never see your or your recap or your any of that investment, like again, this is how I live. So please live how you want. Brannon might absolutely radically disagree with me. I’ve always felt like if I’m good with how much I’m getting at cash at close, fanfreakantastic and anything I get beyond that is gonna make me exponentially.

Like wealthy, like it’s the stock market. We have no clue which stocks we’re betting on. And you have a very small pool, you can do better. But like you are betting in a very like volatile, like to me, it’s very volatile. I think about Bitcoin. People who got in early on Bitcoin, they’re freaking living their life in the best way. Those who went through the really, really, really bad hit, they’re not living their best life. I watched this like multi, multi, multi-million, almost billionaire in Bitcoin go from like kingpin to popper. Like

Literally overnight. I watched him go in like his life and he had everything in Bitcoin and he was one of the top people and it dropped. And I feel like that’s the same thing in dentistry. Like you said, you’re betting on a a company and you have no idea to know what the future of that business is going to do. So I agree with you. I think that people get their shorts burned when they’re banking on all those like huge, huge recaps and all of this equity being worth so much. It’s like I don’t really want to be with them and I don’t really want to be with the lowest end.

I want to be in that middle of the pack and I hope I choose the right one to bet on. But again, the

way Kiera Dent lives, I live very modest. I live very conservative. And I would rather like, am I good at my cash on

close? So if nothing else happens, fantastic. And if something else does happen, I’m going to surely pick my best one. But then I’m really happy no matter what the outcome is. And I’m hoping that I bet on the right one that does give me a great recap. But at the same time, I’m really happy whether it does that or doesn’t. I also love that you talked about like they are not planning to come in to take over.

But you do have to accept that you’re working for a new boss. And I don’t think people realize that. Like you do. You are now an associate. You are not making the same as what you were making before as an owner. That is the price you’ve got paid when you’ve got that check up front. And I think sometimes people forget that check up front, whether you’re a seller on a private side and you’re getting a check there, and now you’re getting an associate pay, or you’re selling to a DSO and your paycheck is not as much. That’s something else that I recommend you look at. Like, what does my life look like post sell? Like I did get that big check, but now I’m gonna live on a much lower income.

Let me maybe practice that for a year before I actually sell. I did that with a doctor and he did much better. He’s like, This is all I get. And I was like, Yeah, that’s your future life. I think that’s that’s it. But you’re also gonna get a very large payout, but that becomes your day in, day out, and make sure that you’re comfortable with that. So Brannon, thanks for like digging into this. I really appreciate the part one, part two today. Are there any last thoughts you have as we’re wrapping up today?

Brannon Moncrief (33:23)

Just a couple of things that I’ll speak on. I think that was well said. Your approach to, hey, you got to be happy with a cash at close, that I would say is the most conservative approach, but that’s a no-brainer, right? If the cash at close gets you where you need to be and everything else is gravy, great. I would argue that the type of equity matters a lot. So,

Kiera (33:40)

I would agree with that.

Brannon Moncrief (33:41)

so the private equity has gotten wise to the fact that this is a provider-centric business. And the way you create alignment with providers is joint venture equity.

retained practice level equity. That is real ongoing equity in your business post sale that has EBITDA distributions. So

Kiera (34:00)

Mm-hmm.

Brannon Moncrief (34:00)

it helps soften the blow as far as your your you know the cut and your take home pay on an annual basis. And it’s real equity in your business that has real value and is going to throw off EBITDA distributions along the way. So I would argue that that equity is a lot safer than than

Kiera (34:17)

I would agree with you completely.

Brannon Moncrief (34:19)

than holding company equity.

If you own equity in the DSO, the outcome could be amazing. It could be terrible, right?

Kiera (34:27)

Agreed.

Brannon Moncrief (34:27)

Could be somewhere in between. So you do need to think about like what is your annual burn rate? What is your postclosing compensation going to look like? How does your chair side wage versus the joint venture equity distributions play into that? And understanding that holding company equity has significantly more risk than joint venture retained equity in your practice.

you’ve got to look at it, you know, in a holistic way.

Kiera (34:54)

Mm-hmm.

Brannon Moncrief (34:55)

but I I I think a lot of your comments were were spot on. And yeah, look, you got to talk about the good and bad, right? And there

Kiera (35:01)

Mm-hmm, mm-hmm.

Brannon Moncrief (35:02)

is nothing in life that is typically a no-brainer with nothing but good. I would also argue that nothing that we’ve talked about today has all bad, you know, associated

Kiera (35:12)

Mm-hmm.

Brannon Moncrief (35:13)

with it. So it’s a balanced equation. You gotta take a holistic approach, you gotta get educated.

And I appreciate you having me here to help do that.

Kiera (35:21)

Yeah, Brannon. Thank you so much for that and agreed. The varying types of equity. Thank you for that correction because you’re right. There are safer equity that you’ve got in the holding one. That’s a full-blown like bet on it and good luck. I really agree with you on like know what it’s going to be post-close what’s your day in, day out burn rate and like what you need to survive on. I feel like that answers so many questions. And Brannon, I I appreciate you doing this. And I hope everybody listening, like, let’s do pen to paper. Reach out to Brannon. I know, Brannon, you guys do free valuations for.

Any client that comes through zero pressure, that’s why I really love you guys, you will talk to them. I feel like you’re very highly educated. You’re one of the biggest brokers in the industry where you’re doing the most transactions of most. And so you’re seeing more and more deals. And I feel like having somebody who does more and more deals, like when I’ve talked to other people, I’m like, what’s your average deal size? Like, am I your higher deal? Am I your lower deal? When I’m talking to financial advisors, I want to know what their average portfolio size is. I don’t want to be the largest and I don’t want to be the smallest. And I need to make sure that who I am at my size of practice.

You’ve done it multiple times and you’re very, very proficient with it because Brannon, you just see, like you said, you’ve 1500 deals. That’s a lot of deals to sit at the table to know the good, the bad, the ugly. You’re not going to be perfect at it, but you’re going to have a lot more at bats that are going to be more congruent. So, Brannon, if people are interested, they kind of want to put pen to paper, start to look to see what it is. Again, I hope you’re not ready to sell. Like Brannon said, and I say, Let’s catch you a few years before you’re ready to do that. That way we can start to make it the best it can be. My side included, we want to catch you before you want to sell. I don’t want to have to like do.

Like Hail Mary moves for a whole year trying to get you to your buy and your EBITDA that you’re looking for. but Brannon, if people want to reach out to you, how can they connect with you?

Brannon Moncrief (36:55)

One of best ways to reach me, I give my cell phone number is to text me and schedule a discovery call. Every conversation we have with a potential client always starts with a 30-minute, confidential, casual discovery call just to get to know each other and figure out does it make sense to move on to the next step and do a thorough evaluation and start that education process? You can text me at 512-660-8505.

Or you can email me, Brannon, that’s B R A N N O N @DentalTransitions.com. But yeah, anybody listening would love to carve out thirty minutes just to get to know you and talk about your why and and what’s next.

Kiera (37:37)

Absolutely. And Brannon, anyone who comes from Dental A Team, be sure to let them know you heard them on the podcast. Brannon does an amazing job taking care of our clients and our listeners. So be sure to let them know. And Brannon, thanks for your time. I feel highly educated. I hope everybody did. I hope you guys enjoyed part one, part two of this today. Brannon, thank you for being such a wealth of knowledge in the industry. We adore you. Our clients adore you. And I’m just grateful for you today. So thank you. Yeah, likewise.

Brannon Moncrief (37:58)

See you. Good to see you. Bye everybody.

Kiera (38:00)

And for everyone listening, thank you for listening. And as always, thanks for listening. And I’ll catch you next time on the Dental A Team podcast.